50th anniversary of Man, Economy, and State

As 2012 draws to a close, we should note that it is the 50^th anniversary of the 1962 publication of Murray Rothbard’s grand treatise, Man, Economy, and State. This was the book that inspired many of today’s “Austrian” economists to devote their careers to this unorthodox but remarkable school of thought. In this essay I’ll first explain who Rothbard was, and then summarize some of the major elements of his treatise.

Murray Rothbard

Murray Rothbard (1926-1995) became interested in laissez-faire economics at a relatively young age. While working on his economics Ph.D. at Columbia University, Rothbard attended Ludwig von Mises’ famous seminar at nearby New York University. According to this biographical essay, Rothbard

made major contributions to economics, history, political philosophy, and legal theory. He developed and extended the Austrian economics of Ludwig von Mises…He…applied Austrian analysis to historical topics such as the Great Depression of 1929 and the history of American banking.

Rothbard was no ivory-tower scholar, interested only in academic controversies. Quite the contrary, he combined Austrian economics with a fervent commitment to individual liberty. He developed a unique synthesis that combined themes from nineteenth-century American individualists such as Lysander Spooner and Benjamin Tucker with Austrian economics. A new political philosophy was the result, and Rothbard devoted his remarkable intellectual energy, over a period of some forty-five years, to developing and promoting his style of libertarianism. In doing so, he became a major American public intellectual.

Although Rothbard would eventually write several books—any one of which would have secured his legacy to economic theory and the political philosophy of liberty—his magnum opus was Man, Economy, and State, to which I now turn.

Style and Scope

Rothbard originally intended his work to be a textbook treatment of Ludwig von Mises’ own magnum opus, Human Action, which had come out in 1949. Indeed, Herbert C. Cornuelle, president of the Volker Fund, was the one to pitch this idea to Rothbard that very year. Rothbard prepared an outline and a sample chapter on money, then received the blessing of Mises himself to go forward with it.

However, as Joseph Stromberg chronicles in exquisite detail in his Introduction to the Mises Institute’s (2004) Scholar’s Edition of MES, upon embarking on the project Rothbard eventually realized that a mere textbook would not be adequate. Cornuelle had visited Rothbard and asked if he thought the work should become a treatise in its own right. Rothbard pondered the question and eventually wrote in response (in February 1954):

The original concept of this project was as a step-by-step, spelled out version of Mises’ Human Action. However, as I have been proceeding, the necessary elaborations on the sometimes sparse framework of Mises has led inevitably to new and original presentations. Now that I have been proceeding to the theory of production where the whole cost-curve situation has to be faced, Mises is not much of a guide in this area. It is an area which encompasses a large part of present-day textbooks, and therefore must be met, in one way or another….A further complication has arisen. A textbook, traditionally, is supposed to simply present already-received doctrine in a clear, step-by-step manner. But not only would my textbook fly in the face of the doctrine as received by 99 percent of present-day economists, but there is one particularly vital point on which Mises, and all other economists, will have to be revised: monopoly theory.

Thus we see that Rothbard eventually realized that he was writing a brand new treatise, resting on the Misesian edifice to be sure, but one that was Rothbard’s own. Not only did Rothbard differ from Mises on certain key points (some of which will be discussed below), but even where their treatments were compatible, Rothbard’s was the clearer and more systematic.

The fundamental difference between Human Action and Man, Economy, and State is that the latter, though intimidating because of its size, is completely self-contained. The intelligent layperson with no prior exposure to any economics can read just Rothbard’s treatise, and walk away understanding the core of orthodox Austrian theory. In contrast, Mises’ classic work assumes a great deal of background knowledge on the part of the reader, including Kantian philosophy, the classical theory of value, and Böhm-Bawerkian capital and interest theory (!). None of this is meant to belittle Mises’ work, but merely to underscore that I personally always point the dedicated newcomer to MES first, and only then to Human Action.

A “Misesian” Work Grounded in Praxeology

Rothbard begins the book closely following in Mises’ footsteps, by categorizing economics as a subset of praxeology, which is the science of human action. According to Rothbard, starting from the basic axiom that human beings act—in other words, that they consciously use means to (attempt to) achieve desired goals—one can logically deduce the entire body of economic principles or laws.

It is interesting to read Rothbard’s description (in a March 1951 letter to Cornuelle) of his method of attack:

What I have in mind for a textbook would be a pioneering project….At each step, the reader would be enlightened through simple, hypothetical examples, until, slowly but relentlessly, he would find himself equipped to tackle the economic problems of the day….[T]hrough this method, even the most confirmed socialist, would step-by-step, beginning with simple praxeological axioms, at the end, suddenly find himself realizing the absurdity of his socialist and interventionist beliefs. He would become a libertarian in spite of himself.

Following Mises, Rothbard and his modern disciples argue that sound economic theory is logically antecedent to empirical investigation. If trying to understand the causes of the Great Depression, for example, one can’t simply “let the facts speak for themselves,” because there are an infinity of possible facts one could assemble for the purpose. (What was the mass of the moon on February 16, 1923, at exactly noon GMT, and might it have something to do with the 1929 stock market crash?) Indeed, the very concepts of money, interest rates, and so forth are themselves theory-laden; one needs to have a praxeological foundation in order to even perceive such categories, because they don’t exist “out there” in “the real world” the way a naïve positivist might suggest.

The Structure of Production

Joe Salerno once told Rothbard that he (Rothbard) had incorporated the capital theory of Böhm-Bawerk into his exposition far more than Mises had done in his own works. For those of us who read MES in our youth, we take this for granted, but Salerno’s observation is perfectly correct: Rothbard takes the crucial yet at times mind-numbingly dry treatments of Austrian capital theory from the masters (mainly Menger, Böhm-Bawerk, and Hayek) and distills them into a very readable discussion. He caps it all off with a beautiful diagram (appearing in the beginning of Chapter 6, “Production: The Rate of Interest and Its Determination”) that I have described as the superior Austrian version of the mainstream’s “Circular Flow Diagram.”

Rothbard’s diagram takes the famous Hayekian triangle and rotates it 90 degrees to the right, so that what is considered the earliest or “highest” stage of production, actually is the highest bar on the diagram. At each step moving downward, the goods-in-process have moved through another period of work, where further inputs of land, labor, and capital goods have been applied, transforming the capital goods to become ever closer to the ultimate consumer goods.

Rothbard’s ingenious construction allows for an “economy-wide” accounting, where the capitalists earn the correct rate of return on their investments each period, and where the net incomes earned by the capitalists, land owners, and laborers each period sum to the total spent on the finished consumer goods emerging from the bottom of the production “pipeline” that period.

Monopoly Theory

Throughout the book, Rothbard makes original contributions, but they are often in the form of making a received point a little more crisply, or by filling in a gap in the standard case for a familiar conclusion. When it comes to monopoly theory, however, Rothbard overturns the tables and starts from scratch.

Rothbard begins his treatment by challenging the very notion of “consumers’ sovereignty” as developed by William Hutt. Hutt (and later Mises) used the term to convey the notion that the “customer is always right,” and that through their spending decisions the consumers in a market economy ultimately allocated resources to competing ends.

Rothbard rejected the term on the grounds of both accuracy and strategy. Strictly speaking, it was simply not true to say that consumers were somehow “sovereign” over producers. Yes, consumers were free to withhold their money, but by the same token business owners were free to withhold their products, and workers were free to withhold their labor. Instead of exhibiting consumers’ sovereignty, Rothbard felt the free market demonstrated individual self-sovereignty.

Rothbard also disliked the term for strategic reasons, because the notion of “consumers’ sovereignty” could be used as an ideal benchmark with which to criticize the performance of the real-world market. Indeed, that is precisely what happened (with the related notion of “perfect competition”) in mainstream welfare economics.

During his preliminary discussion of monopoly, Rothbard makes some brilliant observations. For example, he points out that most economists and the general public are horrified by the formation of a cartel, while they look with favor upon the creation of a corporation. Yet the processes are quite similar, involving individuals pooling their resources into a unified enterprise. Rothbard also generalizes Mises’ calculation argument as originally applied to a socialist State, to show that no single firm could ever encompass the entire economy.

In another tour de force, Rothbard shows the dangers of the mainstream fascination with graphical expositions. It is standard in textbooks to this day to show the inefficiencies of “monopolistic competition” using a diagram where the downward sloping demand curve is tangent to the U-shaped average cost curve on its left side, which is not at the lowest point on the curve. Mainstream economists attribute to this purely geometric result economic significance, claiming that “monopolistically competitive” industries will have “excess capacity” and operate at higher unit costs than a perfectly competitive industry. Yet Rothbard points out that this result follows purely from the convenient assumption of a smooth U-shaped average cost curve. If instead we used a jagged average cost curve (with straight lines connecting discrete points), then a downward sloping demand curve could cross the AC “curve” at its lowest point. In other words, Rothbard showed, the standard textbook critique of industries such as sneakers and breakfast cereals, was based on a graphing decision and had little to do with economic analysis.

After these warm-up sections, Rothbard goes for the throat: He denies the very existence of a so-called “competitive price,” with which to contrast the allegedly inefficient “monopoly price.” Instead Rothbard offers the free-market price, which is the only benchmark that can be discussed coherently.

Critique of Keynesianism

In addition to his positive exposition of sound Austrian economics, Rothbard fills MES with critiques of rival doctrines. I am particularly fond of his discussion of Keynesian economics. The critiques have lost some of their force over the decades, because a typical Keynesian textbook no longer motivates its policy conclusions with the arguments that were common when Rothbard was writing. Even so, Rothbard’s demonstrations are a joy to behold.

My personal favorite is his reductio ad absurdum of the multiplier (based on a similar argument by Hazlitt). After reviewing (what was at that time) the standard Keynesian case that new investment spending will have a “multiplier” impact on total income, Rothbard uses the same approach to “prove” that the reader of his book has a much higher multiplier still.

Specifically, Rothbard sets out a few equations, showing that “Social Income” is equal to the “Income of the Reader” plus the “Income of everyone else.” Then he uses some empirical observation to discover that the “Income of everyone else” is 0.99999 times “Social Income.” After some algebra, Rothbard concludes that “Social Income” is 100,000 times the “Income of the Reader.” The consistent Keynesian, Rothbard notes, should then advocate that the government print up dollars and hand them to the reader of Rothbard’s book, because the “reader’s spending will prime the pump of a 100,000-fold increase in the national income.”

Conclusion

Fifty years after its initial publication, Murray Rothbard’s grand treatise still holds up. I have written a Study Guide for it, and still receive emails monthly from people thanking me for helping them work through this classic book, because they recognize its importance and the knowledge it contains. If anyone considers him or herself a fan of Austrian economics and has yet to try Man, Economy, and State, I promise you are in for a treat.

This essay is based on an article originally published by in The Freeman.